Obama to Wagoner: You're fired - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Obama to Wagoner: You're fired 

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In this issue:
» GM CEO, Rick Wagoner, steps down
» Biyani looks at the bigger picture
» KG basin gas on the anvil
» Another stimulus package in Japan?
» ...and more!

The slowdown in the US has cost another CEO his job. And this time, it's the turn of the auto industry. GM, which recently gave away its title of the world's largest carmaker to Toyota, will no longer be helmed by Rick Wagoner. The man who so doggedly held on to his position for many years had to finally give in to President Obama's auto task force. His departure should be viewed in the context of GM failing in its task of reducing its liabilities and not being in a position to show any visible turnaround signs. The task force now wants to start with a clean sheet and hence, the decision to axe Wagoner. However, it is heartening to note that the company will continue to receive government support as it feels that GM does have in it to engineer a successful turnaround, thanks to its huge R&D set up and a global distribution network. The same cannot be said of rival Chrysler as it is too reliant on the US market and any restructuring of the company will have to involve a partnership, most likely with Fiat.

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It is important to look at the holistic picture and have an individual opinion rather than get swayed away by the public consensus. This is the view of the man who pioneered the retailing boom in India - Mr. Kishore Biyani, the founder of India's largest retailing company - Pantaloon. In an article in the Wall street Journal, Mr. Biyani wrote, "Almost daily doses of bad news on television screens and newspapers have possibly done as much damage to the economy as the events on either side of the Atlantic." We completely agree with him.

Mr. Biyani's predicament is based on the fact that an overwhelming majority of Indian consumers are self-employed, who can neither get laid off nor can have pay cuts. Consider some statistics he has provided. The share of the national income represented by proprietor-run concerns and partnerships is 35%. The share of companies is around 15%, government around 25%, and agriculture around 25%. Combine agriculture and the self-employed in industry and the service sector and nearly 60% of the national income is generated by the self-employed. This section is relatively unhurt by the economic crisis that has struck the rest of the world. A good reason why India should be witnessing an economy recovery ahead of the developed world.

The US administration is in a quandary over the labour issue. The big question facing it is whether foreign workers must be deterred from getting hired. Majority of the Americans would prefer such a stance as the deepening recession has propelled the unemployment rate upwards to 8.1% and which is expected to approach double-digits. But to do so, would also mean resorting to protectionism, something which the US government is not very comfortable doing. While the US is trying to circumvent the issue by not adopting protectionism 'atleast in the trade of goods and services', those advocating immigration, not surprisingly, are of the opinion that it is hypocritical not to apply the same approach to the flow of people. Even if the US decides to make sure that Americans are given priority in terms of getting jobs at the expense of immigrants, the question that arises then is whether the American people are able to or for that matter willing to do certain jobs?

And while we are on the topic of jobs, the International Labour Organisation (ILO) has painted a rather bleak picture. As reported in a leading business daily, it has projected that nearly 90 m net new jobs would be needed over 2009-10 to absorb new entrants in the labour market and to avoid a prolonged jobs gap. If that is not enough, the ILO has even gloomier observations to make. It contends that in previous financial crises, the labour market recovered only 4 to 5 years after economic recovery. While governments across the world are announcing bailout packages and tax incentives to give a shot to their respective economies, the ILO is of the opinion that not much is being stressed on job creation and social protection. This is what the ILO DG Juan Somavia had to say, "We need to implement a coherent and coordinated job-oriented recovery strategy, based on sustainable enterprises, as soon as possible. If stimulus efforts are delayed the jobs crisis will be prolonged and severe and employment may only start to recover from 2011." Certainly, nobody wants such a scenario to enfold!

While banks the world over are wriggling to get themselves out of the crisis that their poor balance sheet quality has got themselves into, there are some in India that have a completely different story to narrate. Take the case of India's largest banking entity SBI, in which the government holds 59% stake. The health of SBI and some of India's other public sector banks have in fact improved in the last fiscal. This is because their conservative business practices and government support has led to higher customer and investor confidence in them. SBI for example managed to grow its deposit base by as much as 40% in 3QFY09 as not just retail but large corporate customers like Infosys shifted funds from foreign and private sector banks to the behemoth. This also explains SBI's willingness to compromise on lending rates even during tough times as it needs to park the excess funds with reasonable profits.

A few days back we had reported on how exports, the mainstay of the Japanese economy, has been mired in one of its worst slump in years. This of course would mean job loss to the tune of tens of thousands of people and a sharp decline in GDP growth. However, if the government intends to avoid such a scenario, it means doing what governments across the world are doing. Resort to fiscal stimulus that is. Japanese media has put the figure at US$ 612 bn to be spread over the next three years, aimed at creating 2 m additional jobs. While that could mean further imperiling the company's huge public debt to GDP ratio, the other option that the Japanese government has, which is of not resorting to stimulus could well lead to even more disastrous results.

The much awaited production of KG basin gas is finally on the horizon. As per a leading business daily, Reliance Industries (RIL) has signed contracts with 12 fertiliser firms for the sale of its first stream of natural gas from its D6 block in the Krishna Godavari basin. The company will sell around 15 m standard cubic meters of gas per day (mscmd) to these firms from mid April at US$ 4.2 per m British thermal units (mbtu). In addition, these companies will pay a transportation margin to RIL, Gail or Gujarat State Petronet. Hence, the actual delivered price will range from US$ 5.34 per mbtu in Andhra Pradesh to US$ 6.21 in Uttar Pradesh.

Fertiliser companies have received a priority allocation because of the gas utilisation policy. Other users like gas based power plants and city gas distribution will receive a share from the subsequent streams from the D6 block. The production is set to increase to 40 mscmd during the year and eventually to 80 mscmd. It may be noted that production was supposed to commence last year but got delayed due to the litigation from RNRL and NTPC. Given that India still imports more than 70% of its hydrocarbon requirement, domestic production is a matter of enormous significance.

After putting up a strong performance the last week, the Indian markets began this week on a bleak note. The indices bore the brunt of profit booking as they ended the day deep in the red. The BSE-Sensex closed with losses of around 460 points, while the NSE-Nifty closed lower by about 120 points. Selling activity was witnessed across sectors led by banking and metals stocks. Most other Asian markets too closed on a weak note. At the time of writing, the European indices were trading in the red as well.

04:46  Today's investing mantra
"Growth can destroy value if it requires cash inputs in the early years of a project or enterprise that exceed the discounted value of the cash that those assets will generate in later years... those who glibly refer to "growth" and "value" styles as contrasting approaches to investment are displaying their ignorance. Growth is simply a component-usually a plus, sometimes a minus-in the value equation." - Warren Buffett
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